2016 (8) TMI 636 - SC - VAT and Sales Tax

Works contract - inter-state sale - the point at which iron & steel products are taxable - the point of incorporation into the building or structure or otherwise - Iron and Steel products are used in the execution of works contracts for reinforcement of cement, the iron and steel products becoming part of pillars, beams, roofs, etc. which are all parts of the ultimate immovable structure that is the building or other structure to be constructed. - Held that - commercial goods without change of their identity as such, are merely subject to some processing or finishing, or are merely joined together, and therefore remain commercially the same goods which cannot be taxed again, given the rigor of Section 15 of the Central Sales Tax Act. - Decision in the case of State of Tamil Nadu Versus Pyare Lal Malhotra 1976 (1) TMI 151 - SUPREME COURT OF INDIA followed. - Decided against the revenue. Works contract - claim of exemption on iron and steel goods used therein - inter-state sale - Held that - the High Court s judgment is correct and does not need to be interfered with inasmuch as the iron and steel goods, after being purchased, are used in the manufacture of other goods, namely, doors, window frames, grills, etc. which in turn are used in the execution of works contracts and are therefore not exempt from tax. - Decided against the assessee.

Issues Involved:
1. Rate of taxability of declared goods under Section 14 of the Central Sales Tax Act, 1956.
2. Whether iron and steel reinforcements lose their character as declared goods when used in works contracts.
3. Applicability of Karnataka Sales Tax Act, 1957, and Karnataka Value Added Tax Act, 2003.
4. Interpretation of relevant constitutional and statutory provisions.
5. Examination of previous judgments and their applicability.
6. Specific case facts and their implications on taxability.

Detailed Analysis:

1. Rate of Taxability of Declared Goods:
The primary issue revolves around the rate of taxability of declared goods, specifically iron and steel, under Section 14 of the Central Sales Tax Act, 1956. The contention is whether these goods retain their character and are subject to a tax rate of 4% or if they can be taxed at a higher rate applicable to civil construction works.

2. Character of Iron and Steel Reinforcements:
The core question is whether iron and steel reinforcements used in buildings lose their identity as declared goods at the point of taxability, i.e., at the point of accretion in a works contract. The judgment concludes that iron and steel products, when used for reinforcement in cement concrete, do not lose their identity as declared goods. They remain the same goods at the point of taxability, and mere cutting and bending do not alter their character.

3. Applicability of Karnataka Sales Tax Act and Karnataka Value Added Tax Act:
The appeals are divided into two groups: one relating to the Karnataka Sales Tax Act, 1957, and the other to the Karnataka Value Added Tax Act, 2003. The judgment examines the relevant provisions of these Acts concerning the taxability of declared goods involved in works contracts.

4. Interpretation of Constitutional and Statutory Provisions:
The judgment discusses Article 286(3) of the Constitution, which imposes restrictions on the imposition of tax on declared goods, and Section 15 of the Central Sales Tax Act, which limits the tax rate to 4%. The interpretation of these provisions is crucial in determining the taxability of iron and steel reinforcements.

5. Examination of Previous Judgments:
The judgment relies on two significant Supreme Court decisions: Builders' Assn. of India v. Union of India and Gannon Dunkerley and Co. v. State of Rajasthan. These cases establish that works contracts involving declared goods are subject to the restrictions of Article 286(3) and Section 15 of the Central Sales Tax Act, meaning they can only be taxed at a single point and at a rate not exceeding 4%.

6. Specific Case Facts:
The judgment examines the factual scenario where iron and steel products are used in construction without undergoing any manufacturing process that changes their identity. The Karnataka Appellate Tribunal's findings are cited, which describe the use of steel bars/rods in construction and conclude that these processes do not constitute manufacturing, and the goods retain their identity.

Conclusion:
The Supreme Court concludes that the declared goods in question, specifically iron and steel reinforcements, retain their character and are subject to a tax rate of 4%. The judgment sets aside the previous decisions against the assessees and affirms the Karnataka Appellate Tribunal's detailed judgment favoring the assessees. The appeals by the State of Karnataka are dismissed, and the taxability of declared goods at the rate of 4% is upheld.

Separate Judgment:
In the case of M/s. Ananth Engineering Works v. State of Karnataka, the appeal is dismissed as the iron and steel goods were used in the manufacture of other goods (doors, window frames, grills) which were then used in works contracts, thus not qualifying for the tax exemption.

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